Will China become the next major global power? Depends on its rural development.

Economic geography has created two Chinas: the prosperous coast and the undeveloped interior. China's future depends on whether it can reconcile this gap between the haves and have-nots. The city-province of Chongqing provides a model for equitable urbanization.

A quiet revolution is happening in China’s hinterland. If you think China’s rise in the past 30 years has changed the world, you ain’t seen nothing yet.

Breakneck growth spurred by government-led economic reforms has lifted hundreds of millions of people out of poverty and transformed a poor agrarian society into a global industrial powerhouse in one generation. Yet, the second largest economy in the world is now at a crossroads. Its spectacular success has brought about byproducts such as a large wealth gap and widespread corruption that threaten the sustainability of its development and social cohesion.

Economic geography has produced two Chinas: the coastal regions built on export-driven growth that increasingly resemble the developed nations of the world and the larger inland regions that are grossly underdeveloped. Will China continue its current trajectory and truly become a major global power as America did more than a century ago? Or will it languish as so many promising developing countries have in an ever-widening divide between the haves and the have-nots with the latter dragging down the former?

The answer may be found in this mountainous and, until recently, one of the most underdeveloped regions deep inside China’s western interior. In merely half a decade, the city-province of Chongqing, half the size of Britain, has become the largest laboratory of public-policy innovation in the world today. Three sets of large-scale policy experiments interwoven by one revolutionary idea – growth with equity – are fast transforming this region. They have long-term implications for the future of China and beyond: urbanization, social fairness, and market economics – based on unmistakably Chinese values.

Urbanization is taking place at a speed and scale unprecedented even by China’s standard. Of the 32 million inhabitants of Chongqing, only 12 million are city dwellers with the remainder being peasants and migrant workers. Unlike the coastal regions that were mostly already urban at the beginning of China’s economic reform 30 years ago, Chongqing’s demographic mirrors China at large. This makes urbanization qualitatively different from what has taken place in the country so far.

In 2008, an Urban-Rural Land Exchange was established. This innovative system essentially securitizes rural residential dwellings, allowing farmers to turn their farmhouses back to arable land in exchange for cash from developers who purchase the square footage in the form of additional quotas for urban real estate development.

Since the beginning of the exchange, $1.5 billion in transactions have taken place, and more than 2 million peasants have moved into the city. Another 1 million are expected to make the transition by the end of 2012. An astonishing total of 7 million peasants are projected to move into the city by 2020, taking the urbanization rate to 60 percent. What is more remarkable is that this demographic shift is taking place without the loss of arable land.

As this social transformation is taking place, the government has stepped in aggressively to ensure the welfare of those who are at risk of being left behind by rapid economic development. Four hundred and thirty million square feet of low-income housing are being built, essentially guaranteeing affordable housing for the bottom third of the population. This is being done in its entirety from government-sourced funding without relying on market forces.

The most impactful reform has been Chongqing's pioneering of a system that automatically grants new city dwellers the much-coveted urban residency status and its accompanying education and healthcare benefits five years after taking up city residence. In one fell swoop, the most intransigent and structural divide that separates all Chinese between city and rural residents, the Hukou system, is at last being breached. The heart-breaking scenes of millions of migrant workers toiling in rich coastal cities without healthcare and education for their children are being eradicated in the Chinese heartland.

To attack corruption, the government began with the hardest nut to crack – the pharmaceutical industry in the public-health sector. It is an open secret that rampant abuse and kickbacks plague the value chain throughout the country. A computerized pharmaceutical procurement system has been built with mandatory participation by all public hospitals. On one screen, all drug purchases by public hospitals are shown with names of suppliers and unit prices on a daily basis, and open to the public in real-time.

This “sunshine drug purchase” program, as it is termed, has covered $5 billion of drug purchases in the 18 months since its launch, and is helping to regain public trust in Chongqing’s healthcare system.

Open-market economics forms the third pillar of Chongqing’s development. In 2007, only 25 percent of Chongqing’s GDP was generated by the private sector with the rest generated by the government and state-owned enterprises. Today, 60 percent is generated by private companies. This remarkable growth has been fueled in part by a daring experiment in micro-finance.

As state banks concentrate their lending to state-owned enterprises, capital formation has been the bottleneck to the expansion of private small and medium enterprises (SMEs) across the country. In Chongqing, however, hundreds of government-approved and regulated private nonbank providers of micro-credit have lent $15 billion to private SMEs this year alone.

At the same time, government industrial policies are spurring large-scale developments in technology and manufacturing. The development model of the coastal regions of the Pearl River and Yangtze River Deltas has been to encourage low-end assembly industries with the advantage of cheap labor and low-cost transportation by sea. Higher value components in industries such as electronics are still being made overseas.

Chongqing, at a transportation disadvantage, has opted to use government levers to enable rapid build-up of scale in downstream assembly. This is driving component makers to move their productions from overseas directly to Chongqing to realize the benefits of economy of scale. In the mobile computing and tablet industry, current trends indicate a remarkable 80 percent of the value being made in the Chongqing region in the near future.

By 2015, 100 million notebook computers and tablets are to be made in Chongqing, the largest such production base in the world. Hewlett-Packar and Foxconn are among the largest corporate investors. Foreign direct investments have grown from $1.2 billion in 2007 to $9 billion in the first three quarters of 2011.

Perhaps the most significant element of the Chongqing phenomenon is its underlying driver: public morality. A uniquely Chinese brand of socialism underpins its social and economic development. The “singing-red” movement, the revival of age-old Communist revolutionary music, reaffirms modern communitarian values that deeply resonate with Chinese culture’s Confucian roots. Only on the basis of a fair and just society can rapid economic development be justified and sustained.

A strong government unapologetic of its leadership role is proving to be effective because it is consistent with the Chinese cultural tradition of honoring moral authority vested in political power. In an increasingly materialistic environment, the government led by the Provincial Committee of the Chinese Communist Party is reclaiming the moral high ground in society.

The implication of Chongqing is significant. The coastal regions that have largely driven China’s growth so far were the low-hanging fruit. What works there may not work in the Chinese inland where the vast majority of the population lives. As a continental nation, without genuine development of its inland regions, China may very well miscarry its rise.

Deng Xiaoping launched China’s economic reforms 32 years ago with the establishment of the first “special economic zone” in the southern town of Shenzhen – the first stop on China’s rise. He relaunched the reforms nearly 20 years ago with his infamous “southern tour” that was best symbolized by the emergence of Shanghai – the second stop. But, the sprawling factories of Shenzhen and the glitzy towers of Shanghai do not yet make a powerful nation.

Could this mountain metropolis be the third stop and final launching pad of the ascendency of a major civilizational power? All eyes on Chongqing.

Eric X. Li is a venture capitalist in Shanghai and a doctoral candidate at Fudan University’s School of International Relations and Public Affairs.